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How can you compete with open source?

Once every three months, Alan Nugent, chief technology officer of billion-dollar software company Novell, sits down with a small group of colleagues to decide what software the company will give away for free.
For the most part, Novell still sells software the old-fashioned way, with a license to use applications written and controlled by Novell. But in the past year, the company has partially converted to the open-source software approach, with which anybody can download a program's source code and modify it.

The result is a hybrid strategy that forces Novell to question whether its commercial products--even portions of its flagship NetWare line--have become commodities that can be easily replaced by open-source substitutes. And increasingly, the answer is yes.

"One of the attributes we look at is whether there is a potential open-source alternative or what elements of open-source can be used in this product," Nugent said. "It's a very dynamic thing."

A rising number of software companies are facing the same dilemma. Once considered a diversion for computing hobbyists, open-source software is increasingly encroaching on traditional markets and, in the process, altering the strategies of powerful technology companies. Many software manufacturers believe that they have little choice but to adopt at least some form of the popular trend, just to keep pace with the rest of the industry.

Some large companies, IBM and Oracle among them, backed open-source operating systems such as Linux as potential replacements for Windows with the hope of loosening Microsoft's grip over much of the industry. In doing so, however, they may have fostered the expansion of open source into their own fields, threatening their products as well.

"This is a complex dynamic, because on the one hand, you need commercial support for (open-source products), but on the other hand, you have this phenomenon of wanting to resist, if you're a commercial provider," said Ted Schadler, an analyst at Forrester Research.

Indeed, just the threat of a viable product born of an open-source project--and such projects now number in the tens of thousands--is already affecting prices of commercial offerings, Schadler said. Microsoft is feeling it with desktop software; others, such as companies that manufacture server middleware and database software, are probably next.

Open source has become something like the invisible hand of the software economy, driving prices down and pinpointing those areas ripe for commodity status. While Microsoft continues to fight it, other companies have no choice but to embrace the technology, even though its long-term profitability remains largely unproven.

The largest software companies, including Novell, IBM, Sun Microsystems, Oracle and Hewlett-Packard, are raising their stakes in open source. Meanwhile, several smaller companies that work exclusively with freely available software--such as Red Hat, JBoss, MySQL and Covalent Technologies--have formed businesses around it.

The adoption of open source has been fueled largely by cost-conscious customers, many of whom are still digging their way out of one of the worst periods in the technology industry's history.

Consider the case of Corporate Express, a Denver-based provider of office and computer supplies. Since installing the Apache Web server about four years ago, the company has steadily increased its use of open-source software, saving between $5 million and $6 million over three years on proprietary-software licensing and gaining higher-quality products. Now, Corporate Express is pushing the use of open source in new areas, such as Java server software, databases and search engines.

To Andy Miller, the company's vice president of technical architecture, the old way of buying infrastructure software such as databases and application servers from big software makers just doesn't make sense. "Why should I pay for that stuff? It's just what I need to run my business applications, which is what really adds value," he said.

The same conditions that made low-cost hardware so common appear to be accelerating in the realm of open-source software. Travel industry giant Sabre Holdings, for example, is moving its mainstream travel applications from IBM mainframes and Hewlett-Packard NonStop servers to several open-source software components that run on cheap, commodity hardware. The company intends to keep storing customer data on the high-end NonStop server and to use a farm of 45 Linux servers that run the open-source MySQL database to handle simple transactions.

Sabre expects open-source software to cohabit with proprietary products that offer more sophisticated features. But open source is the first choice. "We have to have our software costs down to a bare minimum," said Scott Healy, vice president of systems planning and engineering.

Penguins coming home to roost?
Linux servers were the first open-source product to become a mainstay of corporate data centers, but other types of software, such as databases and applications, are quickly gaining viability. And although the rise of Linux has been most threatening to Microsoft, the extension of open source's reach could take proprietary software business away from many other companies as well.

IBM, which was central to spreading the open-source movement beyond its grass roots and into the corporate setting, is another major player that is taking the dual approach of selling proprietary software while offering open-source services. Executives acknowledge the possibility that emerging open-source products will catch up and match the functionality of Big Blue's commercial line.

"There is a risk there," said Doug Heintzman, director of technical strategy for IBM software. "But frankly, it's a waste of energy to overtly try to stop something with a life of its own...The market will always win."

After ditching its own Web server software in favor of Apache in 1998, IBM now invests millions and employs about 1,000 people in open-source projects. Involvement in these communities helps IBM advance industry standards, such as those for grid computing, which help unify Big Blue's disparate products. IBM's commercial products, such as its Eclipse-based development tools, offer richer features than the software available for free.

HP, which recently reported $2.5 billion in revenue from Linux last year, launched a consulting service around an open-source software "stack," which includes the MySQL database, the JBoss Java application server, the Apache Web server, Linux and other freely available components.

The service offering could strain HP's partnership with BEA Systems and Oracle, but the company still sees a good business opportunity in open source, even if the use of proprietary software continues to grow, said Mike Balma, chief Linux business strategist at HP. "There is some obvious overlap...(but) there's enough room in the market for everybody," he said.

As such larger, established companies search for a balance, several purely open-source operations have emerged to challenge the incumbents. Red Hat and SuSE Linux, which Novell acquired last year, hitched on to Linux's rising fortunes in the operating system market, but companies are also seeking business opportunities in other software categories.

Two other rapidly growing open-source companies--Java server software maker The JBoss Group and open-source database manufacturer MySQL--have adopted the "professional open-source" approach, selling a commercial license around free software and offering support and other services.

These companies aren't encumbered by any conflict with proprietary products, unlike their larger competitors, which face a significant challenge in shedding a "not invented here" way of thinking.

Still, open-source middleware, databases and desktop systems represent a tiny fraction of the overall business software market. Commercial software companies argue that the cost of maintaining enterprise-grade software is far more significant than the original price to license it and that open-source offerings fall short in this area. Moreover, well-heeled players like IBM and Microsoft have the resources to invest in research and innovation.

"When (MySQL) has to support enterprise features--that's when the rubber meets the road," said Thomas Rizzo, director of product management for Microsoft's SQL Server database. "Right now, they're copying things that are documented in textbooks."

Open-source software also carries legal risk, as current litigation between the SCO Group and IBM demonstrates. Corporations that consider a deeper commitment to open source should perform legal due diligence to protect themselves from potential lawsuits around patents or copyrights, even with the indemnification offered by providers, said George Weiss, an analyst at Gartner Group.

"It's virtually impossible to guarantee the purity of the code," Weiss said. "Software today is a very touchy area of litigation."

That point was underscored during Sabre's conversion to open-source software. A meeting between technology executives and the company's legal staff "opened the institutional doors" to using open source, said Bob Offutt, Sabre's senior vice president of strategic planning, and the company eventually decided that it was comfortable with its exposure and came up with a policy regarding open source.

If you can't beat 'em...
Because open-source development has become so pervasive, many companies have felt pressure to experiment with it for fear of being left behind.

Server maker Sun, for example, was late in embracing Linux but now is pinning its hopes on open-source packages to break into new markets. Its Java Desktop System, released in December, is a collection of open-source products for which Sun provides support. The company is also considering the possibility of setting one of its most valuable software assets--Java--into open source, said James Gosling, chief technology officer of Sun's development tools division.

Like that of many companies, Sun's investigation of open-source is purely practical. Even before open-source products grew in popularity, companies had been trying new tactics, as the traditional software licensing business suffered rampant price competition.

"Given the way that the cost of goods sold on one unit is essentially zero, it tends to drive the prices down to zero, anyway, whether it's open source or not," said Gosling, who is active in Sun's NetBeans open-source tools initiative. "The average software developer spends more on lattes than they do on tools."

Despite the business conflicts open source poses, commercial stalwarts such as IBM and Novell insist that they benefit from it. In addition to its value as a hedge against Microsoft, some say open source clarifies where software companies should focus their energies.

Marten Mickos, chief executive of MySQL, argues that open-source software benefits all technology companies by creating more demand. As with other products in other industries, open-source offerings can fill the role of commodity goods and leave opportunities for companies to supply high-end products or services.

"Ten years from now," Mickos said, "we will look back and say, 'What did we do before open source?'"

Novell, which is in the throes of a huge internal transition, doesn't have the leisure of looking back just yet. It's not even totally clear that its dual approach of balancing open-source with proprietary software sales is more profitable than the traditional licensing model. But at least some of its executives believe that Novell can make it work, if the company is clever enough.

"The challenge is to stay ahead of the line, where software is commoditized," Nugent said. "You don't want to find yourself on the wrong side of that line."

From the tux to the tie
Open-source technology has changed markedly since Linus Torvalds asked fellow computing hobbyists to suggest changes to his homegrown operating system, which later became Linux.

Over the years, the grassroots approach that spawned the well-known OS and its penguin mascot Tux has taken on an increasingly corporate image. Complex technical tasks, such as adding high levels of security to Linux, can cost millions of dollars, requiring the deep pockets of corporations.

Today, IBM employs 500 developers in open-source projects, and about 1,000 people at Big Blue are involved with the technology in some way.

"There are some real limitations to the model of the hobbyist and volunteerism," said Douglas Heintzman, director of technical strategy for IBM software.

But companies accustomed to commercial software face significant organizational and cultural challenges when working with open source. Novell, for one, has set up strict internal divisions to ensure that code that's destined for open-source projects does not overlap with proprietary products under development. And on the cultural side, the company is working to discourage a "not invented here" bias against open source.

"When you have an engineering company," said Alan Nugent, Novell's chief technology officer, "the thought that other engineering work is better than your own is anathema."